Chapter 15

Control Strategies

 

 

Objectives

 

!          Explain the special challenges that confront MNEs trying to control foreign operations.

!          Describe organizational structures for international operations.

!          Show the advantages and disadvantages of decision-making at headquarters and at foreign subsidiary locations.

!          Highlight both the importance of and the methods for global planning, reporting and evaluation.

!          Give an overview of some specific control considerations affecting MNEs, such as the handling of acquisitions and the dynamics of control needs.

!          Summarize major means of control.

!          Introduce the differences between a branch and a subsidiary.

 

 

Chapter Overview

 

The control process aids in keeping an organization on track as it strives to accomplish its objectives. Chapter 15 examines the ways in which firms group their operations for the purpose of control, as well as the particular factors to consider when deciding where control should be located. The chapter begins with a discussion of the planning loop and then explores the dynamics of various organizational structures. It considers the trade-offs between centralizing and decentralizing the decision-making process and discusses the various mechanisms that can be used to help ensure control measures are in fact implemented. The chapter concludes with an examination of the role of legal structures in the control process.

 

 

Chapter Outline

 

OPENING CASE: Johnson & Johnson [See Map 15.1]


Since beginning operations in 1886, Johnson & Johnson (J&J) has evolved into the most broadly based health-care corporation in the world. It markets its products in more than 175 countries, generates annual global revenues of more than $36 billion and employs more than 108,300 people (of which 60% are located outside the U.S.). J&J’s business strategy aims for leadership in the firm’s three core areas: pharmaceuticals, medical devices and consumer products. It pursues this strategy via a complex organizational structure that combines responsibility across 37 product groups and 14 health-care areas (known as platforms) that act as staging areas from which J&J leverages its knowledge, development skills, marketing expertise and global reach. Formal planning at the business-unit level includes initiatives on major issues such as biotechnology, the restructuring of the health-care industry and globalization. Although J&J’s operating units are largely decentralized, headquarters managers are responsible for coordinating production and marketing on a global basis and dealing with issues common to many or all operating units. Successful employees are rotated among units. Self-directed councils (research, operations, etc.) meet regularly to swap ideas.

 

Teaching Tip: Review the PowerPoint slides for Chapter 15 and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures in the text.

 

I.                   INTRODUCTION

Control represents the planning, implementation, evaluation and correction of performance in order to ensure organizational objectives are achieved. Five major dimensions of control are: planning, organizational structure, the location of decision-making, control mechanisms and control dynamics. The control-related issues MNEs must confront are where decision-making power resides, how foreign operations relate to headquarters and how to ensure the firm meets its global objectives. The control of foreign operations is especially difficult because of distance, country diversity, uncontrollable environmental factors and the degree of uncertainty.

 

II.        PLANNING [See Figure 15.2]

A.                The Planning Loop

Planning represents the process of meshing objectives with internal and external constraints and resources in order to set the means to implement, monitor and correct operations. Strategic intent reflects the long-term objective that provides cohesion while a firm builds global competitive viability. A strategic plan represents a long-term scheme involving major commitments that is designed to guide a firm in the achievement of its objectives. The six steps in the international planning process include:

·         determining long-range strategic intent

·         analyzing internal corporate resources

·         setting international corporate objectives

·         analyzing host country conditions

·         identifying alternatives and priorities

·         implementing the international strategy.

The selection of alternatives will be guided by a firm’s decision to pursue a multidomestic, a global, or a transnational strategy (see Chapter 1). Major factors to consider include:

·         determining long-range strategic intent

·         analyzing the location of value-added functions

·         the location of markets

·         the desired level of involvement

·         product strategy

·         promotion and distribution strategy

·         competitive strategy

·         factor movement and start-up strategy.


B.                 Uncertainty and Planning


A firm’s international operations are by their very nature more complex and less certain than its domestic ones. The more foreign subsidiaries, the more products, the more foreign markets involved, i.e., the greater the uncertainty, the more difficult the planning process.

 

III.       ORGANIZATIONAL STRUCTURE

Organizational structure concerns the reporting relationships within a firm. The choice of structure depends upon a firm’s choice of a multidomestic, global, or transnational strategy, the location and type of foreign facilities and the impact of international operations on total corporate performance.

A.                Separate vs. Integrated International Structures

Most companies will follow one of the structures shown in Figure 15.3. However, no form of organizational structure is without drawbacks.

1.                  International Division Structure. An international division groups all international activities into a single division within a firm. While this structure creates a critical mass of international expertise, the relationship between the international and domestic divisions is often complicated.

2.                  Functional Division Structure. A functional division groups personnel according to business function. It is ideal when products and production methods are undifferentiated across countries. However, as new and different products are added, the structure becomes cumbersome.

3.                  Product Division Structure. A product division groups activities according to the product line with which they are associated. It is well suited for firms with diverse products and for firms that choose to pursue a global strategy.

4.                  Geographic Division Structure. A geographic division groups activities on a regional basis and is used when a firm has extensive foreign operations that are not dominated by a single country or area. The structure is useful when maximum economies of scale and scope can be captured on a regional rather than a global basis.

5.                  Matrix Division Structure. A matrix division is a two-tiered structure designed to give functional, product and/or geographic groups a common focus. It is based on the theory that the groups will become interdependent and thus will more readily exchange information and resources with each other. However, the dual reporting/oversight responsibilities can also create conflicts across groups with differing objectives.

B.                 Dynamic Nature of Structures

A firm’s structure should evolve as the business evolves, changing as the level and type of international activities change.                       

C.                Mixed Nature of Structures


Because of growth dynamics, firms seldom if ever get all of their activities to neatly correspond to a single organizational structure. Most exhibit a mixed structure, particularly with respect to foreign operations.


D.                Nontraditional Structures

As firms grow in size, as their product lines increase in number and as they become more dependent on foreign operations, control becomes more complex. Consequently, new organizational structures continue to evolve.

1.                  Network Organizations. Because of the increase in alliances among firms, effective control will increasingly come from negotiation and persuasion, rather than from authority. A network alliance represents an interdependent group in which each firm is a customer of and a supplier to the other firms. Heterarchy describes the organizational structure in which the management of an alliance of companies is ambiguous, i.e., so-called equals share power. Many Japanese firms are linked through keiretsus, i.e., networks in which each firm owns a small percentage of the others in the network. Keiretsus may be either vertical or horizontal in nature.

2.         Lead Subsidiary Organizations. The major competency for designing, producing and/or marketing a product does not always lie in a firm’s home country. In that case, a firm may choose to locate divisional headquarters in a strategic foreign country.

 

IV.       LOCATION OF DECISION-MAKING

Decisions made at the foreign-subsidiary level are considered to be decentralized; those made above that level are considered to be centralized. The location of decision-making may vary within a firm over time, as well as by product line, function and country. Usually, decentralized decision-making is associated with a multidomestic strategy, centralized decision-making with a global strategy and a combination of the two with a transnational strategy. Reasons for choosing one over the other is partially a function of orientation, i.e., ethnocentric, polycentric, or geocentric (see Chapter 2). Several trade-offs must be weighed with respect to the location of decision-making as it pertains to international operations.

            A.        Pressures for Global Integration vs. Local Responsiveness

The higher the pressure for global integration, the greater the need to centralize decision-making; the higher the pressure for responsiveness to local conditions, the greater the need to decentralize decision-making.

1.                  Resource Transference. Decisions about moving products, inputs and other resources internationally are most likely to be centralized because information will be required from all operating units; often only headquarters possesses all the relevant data.


2.                  Standardization. Standardization is highly unlikely if each subsidiary is free to make its own decisions. Worldwide uniformity of an MNE’s products, inputs, processes and policies usually reduces the firm’s global costs substantially, even though some revenue may be lost in particular niche markets.

3.                  Systematic Dealings with Stakeholders. In certain instances firms need to take a consistent stand with respect to a variety of policies that affect their international operations; in others, global competition may cause a firm to make decisions with respect to one country in order to improve its performance elsewhere. In both instances, centralized decision-making is required.

4.                  Transnational Strategy. A transnational strategy takes advantage of the different competencies and contributions that emanate from anywhere within an organization and integrates them into worldwide operations. A meganational is considered to be a company that thrives on the process of seeking uniqueness it can exploit elsewhere or that complements its existing operations. To the extent that such firms need to coordinate activities across subsidiaries, decision-making should be centralized.

B.                 Capabilities of Headquarters vs. Subsidiary Personnel

Upper management’s perception of the competence of corporate vs. local managers will influence the location of decision-making. The greater the confidence placed in foreign managers, the greater the extent of delegation that will occur. Centralization often reduces the chances for foreign nationals to reach upper level headquarters positions. On the other hand, granting autonomy to local managers in certain areas may attract a higher caliber of management talent at the subsidiary level.

C.                Decision Expediency and Quality

A poor decision may be better than a good one that comes too late, but such a situation should be avoided whenever possible.

1.                  Cost and Expediency. Although corporate management may be more experienced in making certain decisions, the time and expense involved in the centralization process may not always justify the better advice.

2.                  Importance of the Decision. Most critical decisions are made at high levels within an organization. The greater the potential loss and the more important the issue, the higher the level of decision-making and control within a firm. Often firms will set limits on expenditure amounts, thus allowing local autonomy for smaller outlays but requiring corporate approval for larger ones.

 

V.                CONTROL IN THE INTERNATIONALIZATION PROCESS

A variety of factors influence how much control a company needs at different stages of the internationalization process.

A.                Level of Importance


The greater the importance specific foreign operations hold with respect to total corporate performance, the higher the level to which those units should report. Organizational structure, therefore, should change over time to reflect the firm’s increased involvement in foreign activities.

B.                 Changes in Competencies

As a firm’s foreign operations grow, it develops a foreign management group that is more experienced and thus more capable of operating more independently of headquarters. At the same time, the increasing importance of a firm’s foreign operations to total global performance may dictate a greater need for headquarters to be actively involved. The larger the share of foreign operations, the greater the likelihood headquarters will have specialized staff with international expertise. The larger the share of operations in a given country, the greater the likelihood the country unit will have specialized staff.

C.                Changes in Operating Forms

The use of multiple operating forms, such as trade, licensing and direct investment, and the move from one to another may create the need to change areas of responsibility within a firm. To minimize obstacles when responsibilities shift from one group to another, a firm should plan carefully and create organizational mechanisms that ensure the complementarity of activities.

 

VI.       CONTROL MECHANISMS

Whether a company separates or integrates its international operations, it needs to develop a control mechanism/structure to maximize its performance.

A.                Corporate Culture

Corporate culture consists of the common values shared by the employees of an organization that both serve as an implicit control mechanism and help enforce other explicit bureaucratic mechanisms. By promoting closer contact among managers across countries, firms can develop a shared understanding of global goals and norms for reaching those goals. In addition, by facilitating the transfer of “best practices” from one country to another and by transferring managers among operations, firms can help assure appropriate behavior will occur, even when an explicit set of rules does not exist.

B.                 Coordinating Methods

Because each type of organizational structure has its pros and cons, firms may develop mechanisms to capture the desirable advantages of diverse functional, geographic and product perspectives without abandoning their basic strategies and structures. Some of these mechanisms include the development of teams with members from different countries, the strengthening of corporate staffs, greater and more frequent management rotation, the placing of foreign managers on boards of directors and top-level committees and partially basing reward systems on global results.

C.                Reports


Decisions on how to allocate capital, personnel and technology continue without interruption, so reports must be timely, accurate and informative. Written reports are crucial for international operations because subsidiary managers so often lack substantive personal contact with corporate staff.

1.                  Types of Reports. To permit comparisons across operations, most MNEs use reports for foreign subsidiaries that resemble those they use domestically. The primary emphasis of an operations report is to evaluate a subsidiary’s performance; the evaluation of its management should generally be of secondary importance.

2.                  Visits to Subsidiaries. Within many MNEs certain members of the corporate staff spend considerable time visiting foreign subsidiaries in order to collect information and provide direction.

3.                  Management Performance Evaluation. MNEs should evaluate a subsidiary manager separately from the subsidiary’s performance so as not to penalize or reward managers for conditions beyond their control. That said, precisely what is within their control is frequently a matter for disagreement.

4.                  Cost and Accounting Comparability. Headquarters needs to use considerable discretion in interpreting the data it uses to evaluate and change subsidiary performance, especially if it is comparing a subsidiary’s performance with competitors from other countries whose currencies and accounting methods are different from its own.

5.                  Evaluative Measurements. A system that relies on a combination of measurements is more reliable than one that doesn’t. The most important criteria tend to be budget-compared-with-profit and budget-compared-with-revenue. Other non-financial criteria such as market share, quality control and host government relations are also important.

6.                  Information Systems. With ever-expanding computer and global telecommunications links, managers can share information more quickly and easily than ever before. In fact, information technology can facilitate both the centralization and the decentralization of operations. The primary problems associated with information systems concern the cost of information relative to its value, its redundancy and its irrelevance.

 

VII.     CONTROL IN SPECIAL SITUATIONS

Acquisitions, shared ownership and changes in strategy can all create major control problems.

A.                Acquisitions

Acquisitions can result in overlapping geographic responsibilities and markets, as well as new lines of business with which corporate management has no experience. A further problem occurs when the corporate culture of one company is very different from that of the other. Attempts to centralize decision-making or change operating methods may be met with resistance from foreign personnel and host governments alike.

B.                 Shared Ownership


Shared ownership limits the flexibility of corporate decision-making and thus makes control more difficult than it would be with wholly owned operations. Mechanisms that can lead to effective control in this situation include spreading the remaining ownership across many shareholders, dividing equity into voting and non-voting stock, creating side agreements specifying who will exercise what control and maintaining possession of a critical asset the entity needs.

C.                Changes in Strategies

Changes in strategies will necessitate changes in reporting relationships, changes in the type and amount of information to be collected and a need for new performance-appraisal systems. However, it is often difficult to wrest control from country subsidiaries when managers have become accustomed to a great deal of operational autonomy.


VIII.    THE ROLE OF LEGAL STRUCTURES IN CONTROL STRATEGIES

When operating in a host country, companies may choose among legal forms that affect their decision-making, taxes, maintenance of secrecy and legal liability. Most choose a subsidiary form for which there are additional legal alternatives that vary by country.

A.                Branch and Subsidiary Structures

A foreign branch is a foreign operation not legally separate from the parent company. Branch operations are possible only if the parent holds 100 percent ownership. A foreign subsidiary, however, is a separate legal entity, established through foreign direct investment; the parent may or may not own all of the voting stock. Because a subsidiary is legally separate from its parent, legal authorities generally limit liability to the subsidiary’s assets. This concept of limited liability is a major factor in the choice of the subsidiary form. With few exceptions, claims against a firm for its actions are settled by courts either where the actions occur or where the subsidiary is legally domiciled.

B.                 Types of Subsidiaries and Their Effects on Control Structures

When establishing a subsidiary in a foreign country, a firm can usually choose from among a number of alternative legal forms. In addition to differences in liability, forms vary in terms of:

·         the ability of the parent to sell its ownership

·         the number of stockholders required to establish a subsidiary

·         the percentage of foreigners allowed to serve on a board of directors

·         the amount of required public disclosure

·         whether equity may be acquired by non-capital contributions

·         the types of eligible businesses

·         the minimum capital requirements for establishing a subsidiary.

 

ETHICAL DILEMMA:

When Push Comes to Shove, Just Who’s in Control?


A corporate ethics policy requires a control system to both ensure compliance and be compatible with the managerial reward system. However, when local managers are prodded to improve their performance, they may be tempted to violate the firm’s ethical policy. Further, emerging economies are concerned about control strategies that place management and technical functions in the home country and leave only the menial and low-skilled jobs in the host country—they want MNEs to invest control at the local level. The question then becomes to what extent should headquarters be responsible for actions taken at the subsidiary level? Should minority stockholders be responsible for the actions of majority stockholders?

 

LOOKING TO THE FUTURE:

Control/No Control—the Constant Balancing Act

Technology and government-to-government agreements tend to favor global integration and standardization. At the same time, legal, cultural, economic and political differences often remain firmly entrenched. Thus, the search for the most effective strategy continues. Pressures to centralize control in order to deal with the increasing number of global competitors and to respond to the more homogenized needs of global customers continue to mount—so does the risk of clashes emanating from cultural and other national traditions. On the other hand, the sheer size of some firms is pushing them toward decentralization. As MNEs encourage increasingly greater interdependence among their subsidiaries, new heterarchical relationships and structures are likely to surface.

 

WEB CONNECTION

 

Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter 15. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter 15.

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CLOSING CASE: GE Hungary [See Figure 15.4]

 

1.         Define national and corporate cultures. How did GE’s and Tungsram’s cultures differ? How did GE attempt to use its culture as a control mechanism in Hungary and elsewhere?


National culture represents the amalgam of the cultures of various distinct groups that reside within the borders of a country. If a country has only one predominant ethnic group, then national culture and ethnic culture are one and the same. Corporate culture consists of the common values shared by the employees of an organization that both serve as an implicit control mechanism and help enforce other explicit bureaucratic mechanisms. It represents the ways in which attitudes are expressed and the ways in which employees are evaluated and rewarded. GE’s corporate culture partly reflects U.S. national culture. It embodies such typical traits as individualism, self-confidence, pragmatism, optimism, universalism, low power distance, equality and a stronger orientation toward the present rather than the future. Hungarians, however, are less confident, more pessimistic, more particular about relationships than rules and more outer-directed. These national differences can largely be explained by historical experiences. GE relies heavily on culture as a control mechanism. It expects people to behave according to its cultural norms. The company feels strongly that the more it is able to “internalize” its corporate values at the subsidiary level, the more successful it will be in implementing its global strategies and policies. After a cautious start, GE proceeded to embed its corporate culture at Tungsram. Standardization of the manufacturing process for many of its products is but one reason. This change in corporate culture is partly responsible for impressive improvements in Tungsram’s productivity, quality and service. Nonetheless, GE has been accused of heavy-handedness. Its decision to transfer its corporate culture to Tungsram has been a source of such contention that it has resulted in unfavorable publicity for GE throughout the host country.

 


2.       What were the pros and cons of changing GE’s European operations from multidomestic to regional or global? Would such a change work the same for all of GE’s product divisions?

Multidomestic operations are more flexible and can more easily accommodate significant national differences among the countries where a firm is operating. The disadvantage of multidomestic operations is that decisions made on the basis of local considerations may not yield maximum benefits to the corporate organization as a whole. Regional or global operations are better able to take advantage of economies of scale and scope, facilitate the exchange of personnel and cross-country experiences and provide better organizational means of control. The disadvantage is that knowledge about local conditions might not be sufficiently factored into decisions made centrally. However, the change of strategy would not affect all of GE’s product divisions equally. While some products require minimal adaptation across countries, others require extensive changes from country to country.

 

3.                  What factors might account for (a) GE’s initial acquisition and subsequent expansion of light-source manufacturing and R&D in Hungary? and (b) GE’s establishing new types of businesses in Hungary?


GE’s initial acquisition and subsequent expansion of its operations in Hungary were largely due to the fact that light-source manufacturing and R&D fit well with one of GE’s long-time established core businesses (lighting). In addition, Hungary is strategically located in a region that GE wished to enter. Tungsram itself was specifically attractive because of its historical presence in the East European market. Over time the firm had developed a number of important lighting source innovations, and it traditionally sold most of its production outside of Hungary. Although Tungsram’s market position eroded during the closing era of Soviet rule, GE saw an opportunity to effect a turnaround through the infusion of capital, production technology and management know-how. GE then went on to establish several new types of businesses in Hungary (banking, medical equipment, industrial equipment, electrical switches and airplane engine repair) and combined them into a new holding company, GE Hungary Inc. The purpose of the joint holding is to allow GE’s manufacturing operations to negotiate with the government of Hungary as a single voice, to centralize and standardize purchasing, accounting, human resource management and legal representation, thereby generating significant cost savings and improving the firm’s competitive position.

 

4.                  In what ways does GE attempt to gain synergy among its operations in different countries and among its different businesses?

GE has decided to position Tungsram as a lower-priced brand and to introduce its own brand as the premium quality product in Europe. The reason is that GE’s corporate logo ties together all of its activities worldwide. Corporate-wide benefits can be obtained through enlarged market shares, increased specialization, increased cross-border teamwork, the sharing of R&D, technology and other overhead costs, and because new business problems are created for competitors. While the pursuit of such benefits was surely a part of GE’s pre-investment calculations, they are difficult to quantify once realized.

Additional Exercises: Control Strategies

 

Exercise 15.1. A recent trend among MNEs is to replace expatriates in foreign subsidiaries with local managers. Ask students to debate the implications of that policy from the standpoints of (a) the development and implementation of global strategies, (b) the control of foreign subsidiaries and (c) the development of managers with significant international experience and expertise. Does it mean decision-making will necessarily be decentralized?

 

Exercise 15.2. Refer students to five recent cases: GE Hungary and Johnson & Johnson (Chapter 15), Cisco Systems (Chapter 14) and Royal Dutch Shell/Nigeria and Carrefour (Chapter 13). Ask the students to compare the apparent corporate cultures of the five MNEs. Then ask them to propose and defend specific types of organizational structures for each of the firms, given the nature and extent of their operations. Would decision-making be centralized or decentralized?

 

Exercise 15.3. Historically, many foreign firms that competed in the European marketplace established an extensive network of highly autonomous local subsidiaries. However, as Europe has evolved into a single market via the EU, those same firms have often been frustrated in their efforts to shift from a multidomestic to a regional (European) strategy. Ask students to discuss the reasons for this and to suggest mechanisms firms might use to accomplish the shift. Finally, have the students compare the strategic advantages of a long-established multidomestic-type organization to a newly established regionally oriented firm.